Ford Eyes More Cuts
As Recovery Advances
Quality Ratings Up;
Volvo Sale Possible
By MIKE SPECTOR
April 23, 2008; Page A1
DEARBORN, Mich. -- Ford Motor Co., long considered the sickest of the Big Three U.S. auto makers, is showing signs of a surprise turnaround.
When Chief Executive Alan Mulally took over in 2006, Ford was barreling toward the worst one-year loss -- $12.6 billion -- in its 105-year history. A frail U.S. economy and high gasoline prices were ripping into sales.
But in the past year, Mr. Mulally, a former Boeing Co. executive with no auto experience, has improved year-on-year earnings each quarter. In 2007, Ford startled the industry by reporting $400 million in positive operating cash flow, something General Motors Corp. and Chrysler LLC have been hard-pressed to match.
At the same time, the quality ratings of Ford vehicles spiked (a trend that started before Mr. Mulally arrived) and now approach the lofty levels of Toyota Motor Corp. That chopped $1 billion off Ford's warranty costs last year.
The firm isn't done cost-cutting. According to people close to Mr. Mulally, he is looking at selling Volvo despite Ford's repeated statements that it intends to hang on to the brand. Similarly, he hopes to shutter the ailing Mercury brand.
More job cuts may be coming. In Ford's most recent buyout offer, only about 4,000 workers signed on, according to a person familiar with the matter, about half the desired total. Mr. Mulally will likely offer one more round, then could resort to layoffs, people familiar with the matter say.
"Clearly, we have lots of mechanisms to keep taking the fixed costs out," Mr. Mulally says. He declined to comment on the possibility of a Volvo sale, and has long maintained that Ford is committed to Mercury.
Which of Detroit's Big Three do you have the most confidence in? Share your thoughts.On Thursday, Ford's quarterly earnings will offer fresh clues as to whether Mr. Mulally can actually deliver on his promise to be profitable by 2009, a goal many thought improbable a year ago. Analysts expect Ford to post losses of 15 cents a share, according to Thomson Financial, the same as a year earlier. Ford executives have repeatedly said their goal is to continue year-on-year gains.
Like GM and Chrysler, Ford has trimmed costs in ways big and small. It has eliminated more than 46,000 North American jobs in the past few years, or about a third of its work force. It has also reined in a mind-boggling level of vehicle customization, which jacked up costs. Until recently, for instance, the Lincoln Navigator offered 128 options on its console alone.
"You know what 128-factorial is -- it's a lot of combinations," Mr. Mulally joked at a conference recently, mocking the number of designs theoretically resulting from mixing-and-matching the options. (Answer: 3.85620482 x 10 to the 215th power.)
But unlike Chrysler and GM, Ford has also rapidly pared back the number of brands it offers so it can instead focus on the core Ford lineup. Mr. Mulally shed Aston Martin, Jaguar and Land Rover -- acquired over the past two decades -- to steer investment toward Ford and accelerate a push into new small cars, where sales are rising. Shedding Volvo and Mercury would leave Ford with only two lines, Ford and Lincoln, plus a controlling stake in Mazda Motor Corp.
By contrast, GM is sticking with eight brands. Chrysler, a much smaller company, is still sorting out how to position its three.
'Shrink to Grow'
"This is a classic example of how one can shrink to grow," says Peter Nesvold, an analyst at Bear Stearns. Mr. Mulally "is making many difficult decisions during a down cycle, which should benefit the company as they enter the next upturn."
Ford's restructuring could still lose traction. Rising energy prices, Wall Street's debt-market woes and the nation's housing downturn are also hurting auto sales. Annual sales this year could hit their lowest level in more than a decade, according to J.D. Power & Associates.
And while Ford is doing well now with the Edge small SUV, Fusion sedan and Focus compact, car-buyers can be fickle. A few years ago, Chrysler had huge hits with the 300 sedan loaded with a powerful eight-cylinder engine, but its appeal has waned as gasoline prices zoomed past $3 a gallon.
Moreover, Ford still needs cooperation from the United Auto Workers union to replace older workers with lower-paid new hires.
Still, Mr. Mulally, 62 years old, has managed to improve the bottom line during the worst auto-sales downturn in more than a decade, while shifting Ford's vehicle mix away from fuel-thirsty trucks and SUVs. In 2004, Ford relied on large trucks and SUVs for 70% of sales; in March that number was 43%.
Mr. Mulally came to Ford from Boeing, the aircraft maker, where he had spent his entire career. Boeing twice passed him up for the CEO's job despite his work rehabilitating Boeing's once-struggling commercial-airplane division by borrowing efficiency ideas from Toyota.
By the summer of 2006, Ford's troubles were mounting. William C. Ford Jr., then CEO as well as chairman, decided the auto maker needed a new chief executive. A Ford board member suggested Mr. Mulally.
On a Saturday in July, Mr. Mulally flew out for a meeting at Mr. Ford's home in Ann Arbor, Mich. The two quickly hit it off: Both men recall that, during the meeting, they started finishing each other's sentences. They also agreed that, to restore profitability, the company should focus on its core Ford business.
But Mr. Mulally quickly ran up against a corporate culture that viewed Ford as just one brand among many. In one case, he recalls, colleagues suggested he remove the blue Ford logo from the pages of a PowerPoint presentation lest colleagues from Volvo, Jaguar, Lincoln or other brands feel slighted.
"You're going to alienate everybody," Mr. Mulally recalls being told. He capitulated.
A big cause of Ford's trouble was becoming clear to the new CEO. Ford, like GM and Chrysler, profited richly on trucks and SUVs during the 1990s but ceded to the Japanese in cars. Ford only had one small car, the Focus, compared with Toyota's six.
Mr. Mulally was also dumbfounded to discover Ford's various global regions operated independently of one another. After one product-development review, he learned Ford built two Focus small cars, with different parts, depending on the market -- one sporty, hot seller in Europe and a cheaper dud in the U.S.
"Can you imagine having one 737 for Europe and one 737 for the United States?" Mr. Mulally said.
There is a business rationale for designing individual vehicles for different markets. For years, Ford adhered to the strategy as a way to cater to regional consumer tastes.
Mr. Mulally accelerated Ford's restructuring plan, among other things curtailing low-profit-margin bulk sales to rental-car fleets. The move was risky and caused Ford's market share to drop below 15%. For the first time ever, Toyota passed Ford as the second-largest car maker, behind only GM, in the U.S. by sales.
But Mr. Mulally wanted Ford's market share to reach its "natural level" -- the volume where cars sell without big discounts. "I don't care what market-share level you are," Mr. Mulally says, the goal is to "get back to profitability."
Last year's 6% production cut helped Ford command higher prices for its cars, narrowing its annual pretax loss by $4 billion.
Car Makers' Holy Grail
To attack Ford's far-flung operations, he turned to Derrick Kuzak, the North American development chief who had also worked in Europe, where Ford builds several highly regarded cars. The mission: Build a portfolio of "world cars" that share most of their components no matter where they're sold. This is the holy grail for car makers because it improves economies of scale. But it's tricky because it requires global teamwork to build vehicles that appeal across cultures.
Ford's first big test will be the Fiesta subcompact, its first world car under Mr. Mulally, which goes on sale in Europe and Asia this year, then hits U.S. showrooms in 2010. How well Americans receive it will go a long way toward determining whether Ford can compete with foreign rivals.
To improve its competitiveness in small cars, in early 2007 one of Mr. Kuzak's lieutenants assembled a team of engineers, marketers, and other experts to update the Focus compact sold in the U.S. Over the years, Ford executives internally had come to deride such cars as "cheap and cheerful," due to their staid designs. Mr. Kuzak's objective was a tall order -- remake the Focus to be appealing to "millennials," or first-time buyers under the age of 28.
To get inside the heads of young consumers, team members immersed themselves in twentysomething pop culture. In a conference room they posted pictures of the brands and personalities that had managed to appeal to the generation, including actress Jessica Alba and the Starbucks coffee brand. One team member began watching the Disney channel's "Hannah Montana" show, a hit among young people.
To tap into younger consumers' love of cellphones and portable music players, the team decided to center the marketing of the Focus on a new voice-controlled entertainment system called Sync. Developed by Microsoft Corp., it lets drivers use voice commands to control a car stereo, among other things.
As the Focus launch approached, however, sales and market share continued to slide. In April, members of the Ford family (which controls the auto maker) gathered to hear from a Wall Street deal-making firm amid concerns over Ford's suspended dividend and general financial weakness. Meetings like these are often convened to weigh a company's sale. Ultimately, the family decided not to hire the firm lest they undermine Mr. Mulally, whom they wanted to first give a chance, said a person familiar with the situation.
Shortly after that, more tangible signs of turnaround became apparent. The new Edge small SUV was a hit. With production and inventory reigned in, Ford was under less pressure to offer discounts, protecting profit margins. In the second quarter, Ford surprised investors by posting a $750 million profit.
Meanwhile, Mr. Mulally was thinking about distractions -- namely, Ford's other brands including Jaguar and Land Rover. A courteous Midwesterner who often describes things as "neat," Mr. Mulally can resort to profanity when discussing Ford's past acquisitions of noncore brands like these, people familiar with the matter say.
Mr. Mulally says he isn't judgmental about Ford's past decisions.
Ford had already sold Aston Martin, the niche British sports-car maker. In early summer 2007, Mr. Mulally told Mr. Ford they should also part with Jaguar and Land Rover.
Mr. Ford wasn't so sure that was a good idea. Land Rover had some hot-selling new models, and Jaguar seemed to be poised for a comeback. But Mr. Mulally argued the company "can't support all this and have Ford recover as fast as you'd like," according to people familiar with the matter.
Earlier this year, Ford sold the brands to India's Tata Motors Ltd. for $2.3 billion, less than half what it originally paid.
Mr. Ford says he remained "in total sync" with Mr. Mulally "from day one" about selling the luxury brands. Any differences, he says, arose over minutiae in completing a sale.
Last fall, the company made two other big strides. To create a new image for Ford, Mr. Mulally poached Jim Farley, a Toyota marketing guru. In November, the company reached a landmark cost-cutting deal with the United Auto Workers union.
By then the launch of the Focus was under way, and the voice-controlled Sync was such a hit that Ford started offering it as a standard feature on other models. So far this year, vehicle sales in the U.S. are down 8%, but Focus sales are up 23%.
This past January -- about 18 months after his first, logo-free, PowerPoint presentation -- Mr. Mulally started making managers carry around pocket-sized plastic cards outlining his "One Ford" vision in bullet points. At the top of the card: Ford's blue oval.
Write to Mike Spector at [email protected]